By Michelle Harner, University of Maryland Francis King Carey School of Law
When a company is worth more as a going concern than on a liquidation basis, what creates that additional value? Is it the people, management decisions, the simple synergies of the operating business, or some combination of these types of soft variables? And perhaps more importantly, who owns or has an interest in such soft variables? These questions are important in all contexts, but hold particular significance in corporate reorganizations where a company’s liabilities frequently exceed the value of its assets. The value available to satisfy creditors’ claims is limited, and determining the parties’ respective rights to that value is often hotly contested and critical to an effective resolution. My article, The Value of Soft Variables in Corporate Reorganizations, 2015 Ill. L. Rev. ___ (forthcoming), explores these questions under existing legal doctrine and practice norms.
The basic thesis of the article is that soft variables contribute meaningful value to the operation of a company as a going concern but are often overlooked or undervalued in corporate reorganizations. Ignoring soft variables not only does a disservice to those working hardest to save the company but also arguably steals value from the company and those constituencies. If a company’s soft variables do not hold such value, it may indicate that a chapter 7 liquidation is the more appropriate resolution for the company. But if the company invokes the chapter 11 process and the resolution generates value above liquidation or book value, the court and the parties should identify the relevant soft variables and allocate value accordingly.